Zero coupon bonds is a bond that is issued at a discounted price and redeemed at par at the time of maturity.
Lets try and understand this through an illustration
Let us assume that Mr Rahul has invested Rs. 920/- in a zero coupon. Let us further assume that after 1 year he would receive Rs. 1000/- .
In the instant case Rahul pays Rs. 920/- (Discounted price) and he would receive Rs. 1000/- (Par value) after 1 year.
Return (yield) on the bond for Rahul is 8.70% and can be arrived as follows (1000 – 920) / 920
Thus Zero Coupon Bond is nothing but a terminology used for a bond that is issued at a discounted price and redeemed at par on maturity
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